Summary: US and developed world is staring at stagflation or stagnation (low growth with inflation or without inflation)
Savings are required for capital investment. Capital investment and productivity will lead to growth.
But savings are going into entitlements (social security) in developed world leaving no savings for capital investment. Thus, affecting growth.
Part of the problem is that savings are going into entitlements because the population of developed countries is aging very rapidly.
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CNBC Transcript: Former Federal Reserve Chairman Alan Greenspan Speaks with CNBC’s Sara Eisen on “Squawk Alley” Today
CNBC.com
WHEN: Today, Thursday, October 6th
WHERE: CNBC's "Squawk Alley"
Following is the unofficial transcript of a CNBC interview with former Federal Reserve Chairman Alan Greenspan on CNBC's "Squawk Alley" (M-F, 11AM-12PM ET) today, Thursday, October 6th. Following is a link to the story on CNBC.com: http://www.cnbc.com/2016/10/06/former-fed-chairman-greenspan-still-concerned-about-brexit-spillover.html.
All references must be sourced to CNBC.
SARA EISEN: I AM HERE IN OUR ANNUAL TRADITION WITH THE FORMER CHAIRMAN OF THE FEDERAL RESERVE, ALAN GREENSPAN. ALWAYS NICE TO SEE YOU. LAST TIME WE SPOKE, IT WAS THE DAY AFTER BREXIT AND YOU TOLD ME YOU HAD NEVER SEEN ANYTHING WORSE IN ALL OF YOUR TIME IN PUBLIC SERVICE, AND THAT INCLUDES THE 1987 STOCK MARKET CRASH. ARE YOU STILL FEELING AS NEGATIVE ABOUT THE GLOBAL OUTLOOK?
ALAN GREENSPAN: IT WASN'T THE GLOBAL OUTLOOK I WAS CONCERNED ABOUT. I'D NEVER SEEN A SYSTEM BREAK DOWN THAT BADLY AND THE STRUCTURAL BREAKDOWN THAT BREXIT HAS DONE IF IT SPILLS OVER, AS I WAS FEARFUL IT WOULD, INTO, FOR EXAMPLE, SCOTLAND TRYING TO GET ANOTHER VOTE OR ANY NUMBER OF THINGS WHICH WOULD BECOME DISASSOCIATED.
EISEN: SO FAR THE BRITISH ECONOMY AND EURPE HAVE REMAINED RESILIENT.
GREENSPAN: SO FAR IT IS FINE. WE HAVE YET TO SEE WHAT THE ACTUAL IMPLEMENTATION THAT PRIME MINISTER MAY IS GOING TO SAY AND DO WITH RESPECT TO IT. IT'S STILL -- I MUST ADMIT, I'M SOMEWHAT SURPRISED THAT IT HASN'T CREATED A NEGATIVE EFFECT SO FAR THAT I CAN SEE. BUT I THINK IT'S TOO SOON TO MAKE THAT –
EISEN: IS THAT WHAT THE PRECIPITOUS FALL IN THE BRITISH POUND IS TELLING US, NOW DOWN TO 1.26?
GREENSPAN: I DON'T KNOW, BUT OBVIOUSLY TO A CERTAIN EXTENT IT'S GOT TO BE A FACTOR. BUT BE CAREFUL WITH EXCHANGE RATES. THERE ARE ALWAYS A LOT OF FORCES…
EISEN: I KNOW THAT YOU KNOW THAT MUCH BETTER THAN I KNOW THAT. YOU'VE BEEN WARNING ABOUT SLOW GROWTH IN THE UNITED STATES, PRODUCTIVITY PROBLEMS AND NOW YOU'RE INTRODUCING A NEW WORD TO YOUR DIAGNOSIS, STAGFLATION.
GREENSPAN: THAT'S NOT A NEW WORD.
EISEN: WE DON'T HEAR ABOUT IT THAT MUCH.
GREENSPAN: WELL IT COMES OUT OF THE 1970s. ALL THE KEYNESIAN MODELS SAID IT WAS IMPOSSIBLE TO HAVE HIGH UNEMPLOYMENT AND HIGH INFLATION. OR AT LEAST SOME PARTIAL UNEMPLOYMENT. AND IN THE 1970s IT DID, AND EVERYONE SCRAMBLED FOR NEW EXPLANATION, AND THAT'S WHERE THE TERM CAME FROM. AT THE MOMENT IT LOOKS AS THOUGH OBVIOUSLY YOU'VE GOT A STAGNATION THROUGHOUT THE DEVELOPED WORLD AND THE DEVELOPED WORLD IS AGING RAPIDLY. AND THE RATIO OF ENTITLEMENTS AS WE CALL THEM IN THE UNITED STATES AND SOCIAL BENEFITS, WHICH IS WHAT THEY CALL IT ELSEWHERE, AS A PERCENT OF GDP HAS BEEN MOVING UP. AND THE RESULT OF THAT IS A CROWDING OUT ACROSS THE BOARD VIRTUALLY EVERY DEVELOPED COUNTRY IN GROSS DOMESTIC SAVINGS. AND THAT WITH BORROWING FROM ABROAD FINANCES ALL OF CAPITAL INVESTMENT AND CAPITAL INVESTMENT IS THE KEY TO OUTPUT.
EISEN: HOW DOES THAT TAKE YOU TO STAGFLATION, THIS IDEA OF PROLONGED SLOW GROWTH WITH INFLATION?
GREENSPAN: STAGNATION STAYS THERE. WE HAVEN'T HAD -- WE DON'T HAVE ENOUGH EVIDENCE OF WHAT ACTUALLY OCCURS, BUT WE KNOW THAT PRICES ARE BEGINNING TO MOVE UP IN THE UNITED STATES. WE HAVE TO BE VERY CAREFUL ABOUT INTERPRETING THAT BECAUSE THEY'RE NOT MOVING UP VERY MUCH, AND THE REASON IS THAT COSTS ARE MOVING UP, BUT PROFIT MARGINS HAVE BEEN GOING DOWN SHARPLY. AND SO THAT IT IS MASKING THE COST INCREASES WE'RE SEEING. AND ONCE PROFIT MARGINS FLATTEN OUT, THE COSTS COME THROUGH AND INTO PRICES. I HAVE NO IDEA WHEN THAT'S GOING TO HAPPEN. BUT THAT IT'S GOING TO HAPPEN, I THINK IT IS A HIGH PROBABILITY.
EISEN: HIDDEN RISK OF HIGHER INFLATION THAN WE THINK.
GREENSPAN: I THINK THAT ONCE INFLATION STARTS -- REMEMBER, WE'VE GOT -- AT THE END OF THE DAY, IT'S ALWAYS WHAT I CALL UNIT MONEY SUPPLY, WHICH DETERMINES INFLATION RATE. AND THAT'S BEEN TRUE FOR 100 YEARS, MORE THAN 100 YEARS. BUT NOT ON A DAY-BY-DAY BASIS. NONETHELESS, MONEY SUPPLY IS NOW BEGINNING TO ACCELERATE. IT WAS GOING UP AT A CONSTANT 6% ANNUAL RATE FOR QUITE A WHILE AND IN THE LAST SIX TO NINE MONTHS IT'S UP TO 8.5% TO 9%. NOW, THOSE ARE THE EARLY SIGNS OF INFLATION. WE HAVEN'T SEEN IT. I'M NOT SAYING IT IS AROUND THE CORNER, BUT I'M SAYING IT'S OVER THE HORIZON SOMEWHERE, AND I DON'T THINK WE HAVE THE TOOLS TO DETERMINE WHEN IT TAKES HOLD.
EISEN: THAT POSES A PROBLEM AND AN ISSUE FOR THE CENTRAL BANK, JANET YELLIN. I KNOW YOU DON'T LIKE THE GO INTO MONETARY POLICY, BUT ON THE OTHER SIDE OF THAT, THE SLOW GROWTH, DO YOU THINK THE CURRENT ELECTION UNCERTAIN IS WEIGHING ON GROWTH IN THIS COUNTRY?
GREENSPAN: I THINK THE ISSUE MORE GENERALLY, IT'S FISCAL POLICY THAT'S INVOLVED. WHAT WE HAVE TO DO AND NOBODY WANTS TO TOUCH IS THE RISE IN ENTITLEMENTS IN THE UNITED STATES. AND I WOULD PRESUME SIMILAR PRETTY MUCH THROUGHOUT THE DEVELOPED WORLD. AND UNLESS AND UNTIL WE COME TO GRIPS WITH, THAT WE'RE GOING TO GET A CONTINUOUS DOWNWARD PRESSURE --
EISEN: IN PRODUCTIVITY.
GREENSPAN: WELL, FIRST CAPITAL INVESTMENT AND THEN IN PRODUCTIVITY. PRODUCTIVITY IN TWO-THIRDS OF ALL OF DEVELOPED COUNTRIES AND THE DEVELOPING COUNTRIES, TWO-THIRDS OF THOSE COUNTIES HAVE A FIVE-YEAR PRODUCTIVITY INCREASE OF 1% OR LESS. THE U.S. HAD A LONG-TERM PRODUCTIVITY INCREASE OF 2.2%. IT'S NOW THE LAST FIVE YEARS 0.4%. THIS IS AN UNPRECEDENTED --
EISEN: BUT NOBODY'S GOING THERE. YOU SAID IT YOURSELF. NOBODY'S TALKING ABOUT ENTITLEMENTS. WE'RE TALK INFRASTRUCTURE SPENDING. A LOT OF YOUR PROBLEMS THAT YOU DIAGNOSED IN EUROPE ARE NOT BEING ADDRESSED. SO WHAT IS GOING TO BE THE UPSHOT? WHAT IS THE CALL TO ACTION?
GREENSPAN: THAT'S WHAT POLITICAL DEBATES ARE SUPPOSED TO BE DISCUSSING. THE WORD ENTITLEMENTS IS NOT DISCUSSED BY ANYBODY. WHY? BECAUSE IN THE UNITED STATES THE RATE OF INCREASE IN ENTITLEMENTS HAS BEEN 9% A YEAR SINCE 1965 EQUALLY BETWEEN DEMOCRATS AND REPUBLICANS. ENTITLEMENTS IN THIS COUNTRY IS THE THIRD RAIL OF POLITICS. YOU WERE RUNNING FOR OFFICE, YOU MENTION IT, YOU LOSE. THE WORD ENTITLEMENTS HAS NOT APPEARED IN ANY OF THE TRANSCRIPTS --
EISEN: NO, IN THE DEBATES. INSTEAD WE'RE HEARING THAT JANET YELLIN FROM DONALD TRUMP IS BEING POLITICAL, SHE WAS MORE POLITICAL THAN HILLARY CLINTON, HE SAID, AND KEEPING INTEREST RATES LOW TO HELP PRESIDENT OBAMA.
GREENSPAN: I HAVE GREAT SYMPATHY FOR HER. I'VE BEEN THROUGH THAT ROUTINE FOR A LONG TIME PERIODICALLY. YOU HAVE TO GRIN AND BEAR IT, I GUESS. IT'S THE ONLY THING YOU CAN DO.
EISEN: IT MUST BE TRICKY TIMING, THOUGH. SHE IS ON THE BRINK AND HINTING AT AN INTEREST RATE INCREASE GOING INTO AN ELECTION.
GREENSPAN: YES.
EISEN: DOES THAT BECOME A FACTOR IN THE DISCUSSIONS?
GREENSPAN: I THINK, WELL, IT COULD BE A FACTOR, BUT IT'S NOT INVOLVED IN THE DECISIONMAKING. IN MY EXPERIENCE, WHICH IS 20 – 18 AND A HALF YEARS AT THE FED, TWO YEARS WITH THE COUNCIL OF ECONOMIC ADVISERS – PEOPLE ARE AWARE THAT THERE'S AN ELECTION OUT THERE. THEY WOULD PREFER NOT TO DO SOMETHING DURING ELECTION. BUT IF IT IS CALLED FOR, IT IS DONE. AND SO THE REAL QUESTION ESSENTIALLY IS WILL THE FEDERAL RESERVE HOLD BACK WHEN IT SHOULD BE MOVING? I WOULD SAY NO.
EISEN: THE CEO OF UBS JUST TOLD US THAT NEGATIVE INTEREST RATE POLICIES IN EUROPE AND IN SWITZERLAND, WHERE HE'S FEELING ARE CREATING ALL SORTS OF UNINTENDED CONSEQUENCES IN THE BANKING SYSTEM, IN PENSION FUNDS. HE TALKED ABOUT A GLOBAL STOCK MARKET BUBBLE. DO YOU SEE THESE RISKS ARISING FROM THIS MONETARY POLICY?
GREENSPAN: WHICH ONE?
EISEN: NEGATIVE RATES?
GREENSPAN: NEGATIVE RATES IN GENERAL? IT'S NOT GOOD. WELL, FIRST OF ALL, REMEMBER WHAT IT ACTUALLY ACCOMPLISHED. THE WHOLE FINANCIAL INTERMEDIARY SYSTEM IS BASED UPON INTEREST RATES WE'RE SEEING. AND A NEGATIVE INTEREST RATE IS WHAT YOU PAY TO GET CLAIMS ON, FOR EXAMPLE, SWISS LIABILITIES.
EISEN: YEAH. BACKFIRES.
GREENSPAN: THAT MEANS YOUR INTEREST RATE ON INTERMEDIATION, WHICH IS ALL BANKING, ALL FINANCE IN GENERAL, AND A VERY IMPORTANT PART OF A CAPITALIST SYSTEM AS IT DEVELOPS. SO IF YOU HAVE NEGATIVE INTEREST RATES AND THEY STAY TOO LONG, A NUMBER OF THE FINANCIAL INTERMEDIARIES DROP OUT. AND THEY ARE ON THE EDGE.
EISEN: YEAH. IT DOES RAISE QUESTIONS, THOUGH, ABOUT THIS COUNTRY –
GREENSPAN: LIKE MONEY MARKET FUNDS. WHAT DO YOU DO?
EISEN: RIGHT. THERE'S BIG PROBLEMS. SO IF WE GO INTO ANOTHER DOWNTURN IN THIS COUNTRY WITH ZERO – INTEREST RATES AT ALMOST ZERO AND THE FED HAVING ALREADY DONE ALL OF ITS Q/E, WHAT'S NEXT? BUYING STOCKS? THEY DON'T SEEM TO BE IN THE MOOD FOR NEGATIVE RATES.
GREENSPAN: YOU'RE ASKING ME WHAT MONETARY POLICY.
EISEN: I KNOW. YOU CANNOT GO THERE.
GREENSPAN: WELL, IT'S NOT I CAN'T GO THERE, BUT NOT EVERYTHING IS RELATED TO MONETARY POLICY. I THINK MONETARY POLICY HAS DONE AS MUCH AS IT CAN. AND WILL EXPECT IT TO COME IN IN THE EVENT THAT THERE'S A DOWNTURN FROM HERE, AND THERE MAY BE. I MEAN, IT WOULD BE CONSISTENT WITH EITHER STAGFLATION OR JUST STAGNATION. THAT CAN HAPPEN IN BOTH REGIMES. SO WHAT THE POLICY IS, IT'S GOT TO BE FISCAL. BECAUSE THE ROOT OF THE PROBLEM IS ENTITLEMENTS.
EISEN: JOINING THE COURSE OF MANY POLICYMAKERS SAYING THAT CALL FOR FISCAL ACTION. CHAIRMAN GREENSPAN, ALWAYS A PLEASURE.
GREENSPAN: THANK YOU.
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